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Growth in Sri Lanka started to recover in 2013 from a dip in 2012. Power generation, which can constrain economic activity, picked up in May to grow by 9.2% but dropped slightly in June. Imports recorded positive growth in April and June. The deceleration in credit to the private sector shows signs of abating. Growth in gross domestic product (GDP) rebounded to 6.8% in the second quarter of 2013 from 6.0% in the previous quarter, driven by service sector recovery. Industry maintained high growth, while agriculture suffered under bad weather from late 2012.
Inflation eased to 6.3% year on year in August from close to 10% in early 2013. Nonfood inflation dropped below 4% in March-April 2013 but accelerated again to 6% in May as power tariffs rose.
The central bank eased policy rates in December 2012 and again by 50 basis points in May, subsequently reducing in June the statutory reserve requirement by 2%. Bank lending rates decreased from 14.4% in February 2013 to 12.1% in June, easing the deceleration of credit to the private sector.
Both exports and imports showed signs of recovery in the first half as the pace of decrease eased. The trade deficit shrank by 7.1% from the second half of 2012. Workers’ remittances and earnings from tourism partly offset the trade deficit, with remittances growing by 9% in the first half. Financial inflows have been strong, with foreign direct investment amounting to $540.0 million.
The rupee has been under pressure since June from greater import demand. Foreign holdings of government securities dipped in late August, which further weakened the rupee by 5% against the US dollar from the end of May to the end of August. Sri Lanka’s gross official reserves equaled 4.1 months of imports in June 2013, down from 4.5 months in March.
Looking forward, eased monetary policy, continued recovery in services, and improvements in agriculture assuming normal weather will support stronger performance in the second half. External trade is expected to remain weak. The Asian Development Outlook (ADO) 2013 Update retains the April projection for GDP growth in 2013 at 6.8% and in 2014 at 7.2%. As inflation is likely to be contained for the rest of the year as food prices remain stable, the inflation projection for 2013 is revised down to 7.0%. The 6.5% forecast for inflation in 2014 is maintained, as are current account deficit forecasts for both years.
Source: ADB. 2013. Asian Development Outlook 2013 Update. Manila